x
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QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
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¨
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
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TENNESSEE
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62-0634010
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(State
or Other Jurisdiction of
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(I.R.S.
Employer
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Incorporation
or Organization)
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Identification
Number)
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Large
accelerated filer ¨
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Accelerated
filer x
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Non-accelerated
filer ¨
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Smaller
reporting company ¨
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Page No.
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|||
Part I - Financial
Information
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|||
Item
1 - Financial Statements:
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|||
Condensed
Consolidated Balance Sheets as of August 1, 2009 (unaudited) and January
31, 2009
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3
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||
Condensed
Consolidated Statements of Income for the Thirteen and Twenty-Six Weeks
Ended
|
|||
August
1, 2009 (unaudited) and August 2, 2008 (unaudited)
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4
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||
Condensed
Consolidated Statements of Cash Flows for the Twenty-Six Weeks
Ended
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|||
August
1, 2009 (unaudited) and August 2, 2008 (unaudited)
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5
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Notes
to Condensed Consolidated Financial Statements (unaudited)
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6-13
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||
Item
2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
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14-18
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Item
3 – Quantitative and Qualitative Disclosure about Market
Risk
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19
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Item
4 – Controls and Procedures
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19
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Part II - Other Information
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19-20
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Item
1. Legal Proceedings
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19
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||
Item
1A. Risk Factors
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19
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||
Item
4. Submission of Matters to a Vote of Security Holders
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20
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Item
6. Exhibits
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20
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Signatures
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20
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||
Ex-31.1
Section 302 Certification of the CEO
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|||
Ex-31.2
Section 302 Certification of the CFO
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|||
Ex-32.
Section 906 Certification of the CEO and CFO
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August
1, 2009
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January
31,
|
|||||||
(unaudited)
|
2009
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 51,350 | $ | 35,128 | ||||
Receivables,
less allowance for doubtful accounts of $801 and $885,
respectively
|
28,586 | 28,857 | ||||||
Inventories
|
308,918 | 301,537 | ||||||
Other
non-trade receivables
|
16,098 | 15,782 | ||||||
Prepaid
expenses and other current assets
|
10,462 | 11,912 | ||||||
Total
current assets
|
415,414 | 393,216 | ||||||
Property
and equipment, at depreciated cost
|
138,668 | 138,036 | ||||||
Equipment
under capital leases, less accumulated amortization of $4,967 and
$4,928
|
||||||||
respectively
|
- | 39 | ||||||
Other
noncurrent assets, net
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15,441 | 13,484 | ||||||
Total
assets
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$ | 569,523 | $ | 544,775 | ||||
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 90,291 | $ | 69,955 | ||||
Current
portion of indebtedness
|
261 | 243 | ||||||
Accrued
expenses and other
|
43,125 | 45,467 | ||||||
Deferred
income taxes
|
13,557 | 13,061 | ||||||
Income
taxes payable
|
1,302 | 8,941 | ||||||
Total
current liabilities
|
148,536 | 137,667 | ||||||
Long-term
portion of indebtedness
|
4,742 | 4,866 | ||||||
Deferred
income taxes
|
1,263 | 1,328 | ||||||
Other
noncurrent liabilities
|
15,937 | 13,833 | ||||||
Total
liabilities
|
170,478 | 157,694 | ||||||
Commitments
and Contingencies
|
||||||||
Shareholders’
equity:
|
||||||||
Preferred
stock, nonvoting, no par value, 10,000,000 shares authorized, none
outstanding
|
- | - | ||||||
Preferred
stock, Series A junior participating nonvoting, no par
value,
|
||||||||
224,594
shares authorized, none outstanding
|
- | - | ||||||
Common
stock, Class A voting, no par value, 60,000,000 shares
authorized,
|
||||||||
40,046,240
and 39,880,836 shares issued and outstanding, respectively
|
138,052 | 136,877 | ||||||
Common
stock, Class B nonvoting, no par value, 11,500,000 shares
authorized,
|
||||||||
none
outstanding
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- | - | ||||||
Retained
earnings
|
259,930 | 249,141 | ||||||
Accumulated
other comprehensive income
|
1,063 | 1,063 | ||||||
Total
shareholders’ equity
|
399,045 | 387,081 | ||||||
Total
liabilities and shareholders’ equity
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$ | 569,523 | $ | 544,775 |
Thirteen Weeks Ended
|
Twenty-six Weeks Ended
|
|||||||||||||||
August
1,
|
August
2,
|
August
1,
|
August
2,
|
|||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
sales
|
$ | 434,214 | $ | 447,127 | $ | 892,594 | $ | 911,419 | ||||||||
Cost
of goods sold
|
313,472 | 323,276 | 642,875 | 655,087 | ||||||||||||
Gross
profit
|
120,742 | 123,851 | 249,719 | 256,332 | ||||||||||||
Depreciation
and amortization
|
6,489 | 6,779 | 12,927 | 13,862 | ||||||||||||
Selling,
general and administrative expenses
|
106,097 | 115,126 | 214,955 | 228,786 | ||||||||||||
Operating
income
|
8,156 | 1,946 | 21,837 | 13,684 | ||||||||||||
Interest
income
|
(55 | ) | (104 | ) | (78 | ) | (202 | ) | ||||||||
Interest
expense
|
133 | 181 | 265 | 452 | ||||||||||||
Income
before income taxes
|
8,078 | 1,869 | 21,650 | 13,434 | ||||||||||||
Provision
for income taxes
|
3,838 | 836 | 8,860 | 5,151 | ||||||||||||
Net
income
|
$ | 4,240 | $ | 1,033 | $ | 12,790 | $ | 8,283 | ||||||||
Net
income per share
|
||||||||||||||||
Basic
|
$ | 0.11 | $ | 0.03 | $ | 0.32 | $ | 0.21 | ||||||||
Diluted
|
$ | 0.11 | $ | 0.03 | $ | 0.32 | $ | 0.21 | ||||||||
Weighted
average shares outstanding
|
||||||||||||||||
Basic
|
39,914 | 39,794 | 39,904 | 39,879 | ||||||||||||
Effect
of dilutive stock options
|
72 | 26 | 97 | 15 | ||||||||||||
Diluted
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39,986 | 39,820 | 40,001 | 39,894 | ||||||||||||
Dividends
per common share
|
$ | 0.03 | $ | 0.02 | $ | 0.05 | $ | 0.04 | ||||||||
Comprehensive
income:
|
||||||||||||||||
Net
income
|
$ | 4,240 | $ | 1,033 | $ | 12,790 | $ | 8,283 | ||||||||
Other
comprehensive income (expense), net of tax
|
||||||||||||||||
postretirement
plan adjustment
|
- | (11 | ) | - | (22 | ) | ||||||||||
Comprehensive
income
|
$ | 4,240 | $ | 1,022 | $ | 12,790 | $ | 8,261 |
For the Twenty-Six Weeks
Ended
|
||||||||
August 1, 2009
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August 2, 2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$ | 12,790 | $ | 8,283 | ||||
Adjustments
to reconcile net income to net cash flows from operating
activities:
|
||||||||
Depreciation
and amortization
|
12,927 | 13,862 | ||||||
Net
gain on asset disposition
|
(19 | ) | (895 | ) | ||||
Provision
for store closures and asset impairment
|
- | 419 | ||||||
Stock-based
compensation
|
996 | 1,093 | ||||||
Recovery
of uncollectible receivables
|
(84 | ) | (244 | ) | ||||
LIFO
reserve increase
|
591 | 1,921 | ||||||
Deferred
income tax expense
|
509 | 3,533 | ||||||
Income
tax benefit upon exercise of stock options
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26 | 11 | ||||||
Provision
for post retirement medical
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- | (22 | ) | |||||
(Increase)
decrease in operating assets:
|
||||||||
Trade
receivables
|
39 | 5,110 | ||||||
Inventories
|
(7,971 | ) | (17,275 | ) | ||||
Other
assets
|
1,450 | 749 | ||||||
Increase
(decrease) in operating liabilities:
|
||||||||
Accounts
payable and accrued expenses
|
17,994 | 22,047 | ||||||
Income
taxes payable
|
84 | (11 | ) | |||||
Other
noncurrent liabilities
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(5,722 | ) | 750 | |||||
Net
cash provided by operating activities
|
33,610 | 39,331 | ||||||
Cash
flows from investing activities:
|
||||||||
Capital
expenditures
|
(11,920 | ) | (9,379 | ) | ||||
Proceeds
from asset dispositions
|
15 | 2,286 | ||||||
Insurance
recoveries for replacement assets
|
- | 220 | ||||||
Asset
acquisition, net (primarily intangibles)
|
(3,555 | ) | (998 | ) | ||||
Net
cash used in investing activities
|
(15,460 | ) | (7,871 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Payments
of indebtedness and capital lease obligations
|
(105 | ) | (207 | ) | ||||
Proceeds
from revolving line of credit
|
- | 198,370 | ||||||
Payments
on revolving line of credit
|
- | (229,005 | ) | |||||
Excess
tax charges from stock-based compensation
|
(26 | ) | (11 | ) | ||||
Proceeds
from exercise of stock options and employee stock purchase
plan
|
205 | 279 | ||||||
Cash
dividends paid
|
(2,002 | ) | (1,597 | ) | ||||
Net
cash used in financing activities
|
(1,928 | ) | (32,171 | ) | ||||
Increase
(decrease) in cash and cash equivalents
|
16,222 | (711 | ) | |||||
Cash
and cash equivalents:
|
||||||||
Beginning
of year
|
35,128 | 10,266 | ||||||
End
of year
|
$ | 51,350 | $ | 9,555 | ||||
Supplemental
disclosures of cash flow information:
|
||||||||
Interest
paid
|
$ | 184 | $ | 343 | ||||
Income
taxes paid
|
$ | 14,360 | $ | 500 | ||||
Non-cash
investing and financial activities:
|
||||||||
Assets
acquired through term loan
|
$ | - | $ | 450 | ||||
Common
stock issued for purchase of capital assets
|
$ | - | $ | - |
Thirteen Weeks Ended
|
Twenty-Six Weeks Ended
|
|||||||||||||||
August 1,
2009
|
August 2,
2008
|
August 1,
2009
|
August 2,
2008
|
|||||||||||||
Stock
option expense
|
$ | 280 | $ | 278 | $ | 540 | $ | 649 | ||||||||
Restricted
stock expense
|
176 | 195 | 350 | 356 | ||||||||||||
ESPP
expense
|
53 | 44 | 106 | 88 | ||||||||||||
Total
stock-based compensation
|
$ | 509 | $ | 517 | $ | 996 | $ | 1,093 | ||||||||
Income
tax benefit on stock-based compensation
|
$ | 101 | $ | 111 | $ | 216 | $ | 226 |
Thirteen Weeks Ended
|
Twenty-Six Weeks Ended
|
|||||||||||||||
August 1,
2009
|
August 2,
2008
|
August 1,
2009
|
August 2,
2008
|
|||||||||||||
Stock Options
|
||||||||||||||||
Expected
volatility
|
42.6 | % | 40.2 | % | 42.6 | % | 40.3 | % | ||||||||
Risk-free
interest rate
|
2.6 | % | 3.3 | % | 2.6 | % | 3.4 | % | ||||||||
Expected
option life (in years)
|
5.84 | 5.84 | 5.84 | 5.84 | ||||||||||||
Expected
dividend yield
|
0.55 | % | 0.49 | % | 0.55 | % | 0.45 | % | ||||||||
Weighted
average fair value at grant date
|
$ | 4.58 | $ | 4.82 | $ | 4.58 | $ | 4.60 | ||||||||
Employee Stock Purchase
Plan
|
||||||||||||||||
Expected
volatility
|
73.5 | %1 | 37.8 | % | 83.9 | %1 | 39.4 | % | ||||||||
Risk-free
interest rate
|
0.1 | % | 3.1 | % | 0.1 | % | 3.1 | % | ||||||||
Expected
option life (in years)
|
0.5 | 0.5 | 0.38 | 0.38 | ||||||||||||
Expected
dividend yield
|
0.34 | % | 0.34 | % | 0.26 | % | 0.26 | % | ||||||||
Weighted
average fair value at grant date
|
$ | 3.78 | $ | 2.44 | $ | 3.68 | $ | 2.31 | ||||||||
Options
|
Weighted
Average
Exercise Price
|
Weighted Average
Remaining
Contractual Life
(Years)
|
Aggregate
Intrinsic
Value
(Thousands)
|
|||||||||||||
Outstanding
at January 31, 2009
|
1,138,111 | $ | 15.13 | 3.9 | $ | 11 | ||||||||||
Granted
|
327,204 | $ | 11.06 | |||||||||||||
Forfeited
/ Cancelled
|
(91,753 | ) | $ | 19.42 | ||||||||||||
Exercised
|
(600 | ) | - | |||||||||||||
Outstanding
at August 1, 2009
|
1,372,962 | $ | 13.88 | 3.7 | $ | 1,639 | ||||||||||
Exercisable
at August 1, 2009
|
669,362 | $ | 16.04 | 2.2 | $ | 263 |
Number of Shares
|
Weighted Average
Grant Date Fair
Value
|
|||||||
Non-vested
Restricted Stock at January 31, 2009
|
352,784 | $ | 12.39 | |||||
Granted
|
19,237 | $ | 12.41 | |||||
Forfeited
/ Cancelled
|
(25,791 | ) | $ | 14.34 | ||||
Vested
|
(16,803 | ) | $ | 16.68 | ||||
Non-vested
Restricted Stock at August 1, 2009
|
329,427 | $ | 12.02 |
August
1, 2009
|
January
31,
|
|||||||
(unaudited)
|
2009
|
|||||||
Property
and equipment, at cost:
|
||||||||
Buildings
and building improvements
|
$ | 93,827 | $ | 91,826 | ||||
Leasehold
improvements
|
53,727 | 49,775 | ||||||
Automobiles
and vehicles
|
5,321 | 5,223 | ||||||
Airplane
|
4,697 | 4,697 | ||||||
Furniture,
fixtures and equipment
|
236,313 | 230,272 | ||||||
393,885 | 381,793 | |||||||
Less:
Accumulated depreciation and amortization
|
(261,740 | ) | (251,002 | ) | ||||
132,145 | 130,791 | |||||||
Construction
in progress
|
190 | 912 | ||||||
Land
|
6,333 | 6,333 | ||||||
Total
Property and equipment, at depreciated cost
|
$ | 138,668 | $ | 138,036 |
Balance at
January
31, 2009
|
Additions
FY09
|
Utilized
FY09
|
Balance at
August 1,
2009
|
|||||||||||||
Lease
contract termination liability
|
3.5 | 0.3 | 1.7 | 2.1 | ||||||||||||
$ | 3.5 | $ | 0.3 | $ | 1.7 | $ | 2.1 |
Twenty-Six Weeks Ended
|
Year Ended
|
|||||||||||
(in thousands)
|
August 1,
2009
|
August 2,
2008
|
January 31,
2009
|
|||||||||
Accumulated
other comprehensive income
|
$ | 1,063 | $ | 1,040 | $ | 1,040 | ||||||
Amortization
of postretirement benefit
|
- | (21 | ) | 23 | ||||||||
Ending
balance
|
$ | 1,063 | $ | 1,019 | $ | 1,063 |
|
·
|
The
third year incremental raising of the federal minimum wage which will
negatively impact our labor expense by approximately
$2.3 million.
|
|
·
|
The
continued product mix shift to basic and consumable items, coupled with
intense pharmacy competition, will continue to negatively affect gross
margin.
|
|
·
|
The
positive margin impact of our Own Brand initiatives as mentioned in
previous paragraphs.
|
|
·
|
Economic
and weather conditions which affect buying patterns of our customers and
supply chain efficiency.
|
|
·
|
Changes
in consumer spending and our ability to anticipate buying patterns and
implement appropriate inventory
strategies.
|
|
·
|
Continued
availability of capital and
financing.
|
|
·
|
Competitive
factors.
|
|
·
|
Changes
in reimbursement practices for
pharmaceuticals.
|
|
·
|
Governmental
regulation.
|
|
·
|
Increases
in fuel and utility rates.
|
|
·
|
Potential
adverse results in the Fair Labor Standards Act (“FSLA”) litigation
described under Legal Proceedings on page
20.
|
|
·
|
Other
factors affecting business beyond our control, including (but not limited
to) those discussed under Part 1, ITEM 1A “Risk Factors” of the Company’s
Annual Report on Form 10-K for the fiscal year ended January 31,
2009.
|
|
(a)
Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures.
As of the end of the period covered by this report, the Company
carried out an evaluation, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the Company’s disclosure controls and procedures
(as defined in Rules 13a-15(e) under the Securities and Exchange Act of
1934, as amended (the “Exchange Act”)). Based on that
evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the Company’s disclosure controls and procedures are
effective to ensure that information required to be disclosed by the
issuer in the reports that it files or submits under the Act (15 U.S.C. 78
et seq.) is recorded, processed, summarized and reported, within the time
periods specified in the Commission’s rules and
forms. Additionally, they concluded that our disclosure
controls and procedures are designed to ensure that information required
to be disclosed by the Company in the reports that the Company is required
to file or submit under the Exchange Act is accumulated and communicated
to management, including the Chief Executive Officer and the Chief
Financial Officer, as appropriate to allow timely decisions regarding
required disclosures.
|
|
(b)
Changes in
Internal Control over Financial Reporting. There have been no
changes during the quarter ended August 1, 2009 in the Company’s internal
control over financial reporting (as defined in Exchange Act
Rule 13a-15(f)) that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
|
Election
of Directors:
|
For
|
Abstain
/
Against
|
Withheld
|
Broker
Non-
Vote
|
||||||||||||
Michael
J. Hayes
|
15,506,843 | 22,517,939 | 2,011,778 | |||||||||||||
John
R. Eisenman
|
15,362,184 | 22,662,599 | 2,011,778 | |||||||||||||
Roger
T. Knox
|
15,359,840 | 22,664,943 | 2,011,778 | |||||||||||||
Thomas
H. Tashjian
|
16,878,237 | 21,146,546 | 2,011,778 | |||||||||||||
B.
Mary McNabb
|
15,367,508 | 22,657,275 | 2,011,778 | |||||||||||||
Michael
T. McMillan
|
15,364,742 | 22,660,041 | 2,011,778 | |||||||||||||
Bruce
A. Efird
|
17,232,028 | 20,792,755 | 2,011,778 | |||||||||||||
Appointment of BDO Seidman, LLC
|
37,937,192 | 37,507 | 19,312 | |||||||||||||
Shareholder
Proposal
|
26,986,824 | 8,238,309 | 50,538 |
31.1
|
Certification
of Chief Executive Officer.
|
31.2
|
Certification
of Chief Financial Officer.
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to rule
13a–14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section
1350.
|
FRED'S,
INC.
|
||
Date: September 10, 2009
|
/s/ Bruce A. Efird
|
|
Bruce
A. Efird
|
||
Chief
Executive Officer and President
|
||
Date: September 10, 2009
|
/s/ Jerry A. Shore
|
|
Jerry
A. Shore
|
||
Chief
Financial
Officer
|